Vote Your Stock

13 Pages Posted: 16 Aug 2004

Date Written: August 12, 2004

Abstract

Individual investors are the sleeping giant of corporate governance. The recent implementations of stock voting on the internet and mutual fund vote disclosure in the USA pave the way for three fundamental reforms to awaken that giant: voting by advisor brand reputation; revoking the assignment of voting authority to intermediaries; and strengthening voting advisor brands by paying them with corporate funds directed by shareowners.

We prevent vote-selling in politics by requiring confidential voting. For voting of shares however, the current trend is toward public disclosure of institutional investor votes, in the hope that this will encourage voting in the interests of beneficial owners. Unfortunately, such disclosure facilitates vote-selling, which undermines all shareowners' interests. We can reduce this problem by unbundling portfolio management from proxy voting, making voting intermediaries compete for reputation.

The corporate governance structures currently prevalent in the USA give managers strong incentives to inflate short-term earnings while secretly harming the long-term value of the firm. This hurts shareowners, but lack of information prevents them from defending themselves. Thus the information and decision system improvements proposed here can help shareowners reduce such management short-termism as selecting acquiescent auditors, taking advantage of consumers and employees to temporarily boost earnings at the expense of the firm's reputation, and polluting.

Diversified shareowners have a self-interest in reducing public harm caused by their firms, even if that harm will never be discovered and will never hurt the firm's reputation or stock price. This is because as members of the public, shareowners would suffer some of that harm themselves. Managers are members of the public too, but their relative lack of diversification gives them very little self-interest in balancing public harm against profit. This conflict of interest between managers and shareowners would likewise be reduced by a better monitoring system, so the proposals here can be expected to reduce such negative externalities. Much corporate political influence inflicts negative externalities, so these corporate governance reforms can lead to political reforms also, reducing corruption in both arenas.

Keywords: Proxy voting, corporate governance, free-rider problem, monitoring, corporate democracy

JEL Classification: D72, G34, K22

Suggested Citation

Latham, Mark, Vote Your Stock (August 12, 2004). Available at SSRN: https://ssrn.com/abstract=576602 or http://dx.doi.org/10.2139/ssrn.576602

Mark Latham (Contact Author)

Votermedia.org ( email )

Vancouver, British Columbia
Canada
(604) 608-9779 (Phone)

HOME PAGE: http://votermedia.org

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